What are Mergers and Acquisitions and do they produce synergies…

Take a look at the Investopedia writeup on Mergers and Acquisitions. Today in class I expressed some skepticism on whether or not synergies result from mergers and acquisitions. The Investopedia article has some reservations also. Allow me to quote:

That said, achieving synergy is easier said than done – it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers – who have much to gain from a successful M&A deal – will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price.

So although I tend to be pessimistic and skeptic, there is reason not to assume all M&As are good M&As. In fact, Investopedia has a 7 part series on M&As. Part 6 articulates why M&As can fail. Again, allow me to quote:

It’s no secret that plenty of mergers don’t work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.

So, for an M&A to be successful there must be management foresight, an ability to overcome practical challenges, and diligence in monitoring day to day operations. Perhaps smaller size mergers perform better than larger mergers…